The Transmission Mechanism Of The U.S. Monetary Policy On Chinese Economy

The U.S. monetary policy has become one of the important issues especiallysince the latest global financial crisis booming in2008. Although the Federal Reservedecreased the Federal Funds Rate for recovering the economy from the downturn, theunemployment rates were not stopping falling. Under this condition, the QuantitativeEasing Monetary Policy has been lunched by Federal Reserve, which is the one ofunconventional monetary policies.Generally, monetary policy mainly focuses on stable the macro economysituation using operating tools to control the consumption, output, employment aswell as inflation rate. For example, the central bank could loose monetary policy, likeimproving interest rate, to encourage the consuming or investment during the shrunkof economy. Usually, there are three normal monetary policy tools have been used byFed, Open Market Operation, the Discount Rate and Reserve Requirements. However,the latest financial crisis was more seriously than the Fed’s expectation. Therefore,four rounds of the Large Scale Asset Purchases (LASPs) have been taken forrecovering the economy from the downturn. From November2008to March2010,Fed has purchased the kinds of agency debt and agency mortgage-backed securities,and the scales have been enlarging to purchase U.S. treasury. From November2010toJune2011, Fed has purchased six trillion dollars of long-term treasury. Fed haspurchased the mortgage-backed securities and the long-term asset treasury fromSeptember2012to December2012and from December2012to December,2013separately. Certainly，it has been approved that the quantitative easing plays an crucialrole of decreasing unemployment rates and increasing the liquidity for economy,which is a policy mainly focused on deduced the yield of long-term securities asobjective and modified public expectation to simulate consumption.As the largest emerging market in the world, the correlationship between Chinaand the U.S. as well as with the other countries in the world was closer than any otherperiod. And also with completion about the interest rate marketing and the reform ofexchange rate, the effects of the global economy situation on the Chinese economywill be more significantly. At the meanwhile, the independence of monetary policy that carries out by the People’s Bank of China could also be threatened by integrationof global economies. As the largest partner in the world between China and U.S., theinfluence of the U.S. monetary policy on the Chinese economy must be underconsideration.There are some researches confirmed that the inflation would be transmittedindirectly to emerging markets, which is caused by the depreciation of the U.S. dollar.However, there are less literatures combine the transmission mechanism with thechannels of monetary policy together to analyze the impact of quantitative easingmonetary. Therefore, based on the theories of monetary policy, this paper divided theU.S. monetary policy into controversial and unconventional monetary policy whichusing the Federal Funds Rates and the Total Reserve Balance to indicate respectively,and employed the Structure Vector Autoregression model, analyzed the effects of theU.S. monetary policy on the Chinese macro economy indicators, like money supplyand demand. CPI, the real exchange rate, and trade balance. Basically, the resultsbelow have been tested:Firstly, after statistic descriptions of the relationships for GDP, CPI, total amountof construction investment and trade balance between the China and U.S.. It has beenfound that the changes of Chinese GDP and CPI are accord with that of the U.S.especially during the financial crisis. However, the relationship of the total amount ofconstruction investment and trade balance from China to the U.S. was completelycontrary. And also, it seems that comparing the Chinese deposit rate has the characterof time lagging after comparing with the Federal Funds Rate. Secondly, the depositrate, M2and the inflation rate are response to the shocks of Federal Funds Rate.Thirdly, it has been influenced by the U.S. unconventional monetary policy on theChinese real exchange rate, trade balance, and the Chinese monetary policy.Based on the general results, first, the Chinese government should adjust theindustrial structure step by step, and also transfer the growth of economy fromover-depend on investment and export to consumption. Second, properly promotingthe exchange rate regime reform and opening of the capital account for in case ofviolation of the economy. At the same time, for keeping the independence of thedomestic monetary policy and for stable financial system, heathly operation andcompetitive should be encouraged through the banks.